On this day in economic and financial history …
The Nasdaq Composite (INDEXNASDAQ:.IXIC) reached its all-time high on March 10, 2000, only a day after breaking the 5,000-point barrier. It was a positive day by only the slimmest of margins, as the tech-heavy index tacked on only 1.78 points to close at 5,048.64. At the same time, the Dow Jones Industrial Average (INDEXDJX:.DJI), which was already 15% lower than its mid-January peak, fell further as its component drugmakers and financials shed value over fears of higher interest rates. It was a highly symbolic day, according to CNNMoney, as the Nasdaq held above 5,000 while the Dow sank beneath the 10,000-point level for only the fourth time since the previous April.
The Nasdaq’s peak became the ultimate investing cautionary tale in later years, as swarms of pundits emerged to say “I told you so!” Where were they when the bubble was inflating to dangerous levels? Dot-com analysts pointed to “momentum” and “insatiable demand” without considering the financial fundamentals of the Nasdaq’s many bubbly stocks. One of these analysts simply said that “if you’re an astute observer, your portfolio will reflect what’s new and exciting and dynamic.” Everyone was buying trendy stocks because everyone was buying trendy stocks. It was circular logic at its finest.
A book titled Dow 100,000 had been published only half a year before the Nasdaq’s peak, and it became widely mocked after the bust for its wide-eyed optimism. Federal Reserve Chairman Alan Greenspan, having apparently forgotten his 1996 pronouncement that the market suffered from “irrational exuberance,” noted on March 10 that CEOs Jack Welch and Lou Gerstner of economic bellwethers General Electric Company (NYSE:GE) and International Business Machines Corp. (NYSE:IBM) were both enraptured by the market’s rise. Greenspan quoted the two executives as believing it was a “true revolution” and that “they have seen nothing like this in their experience.”
That revolution sputtered out once investors realized that fundamentals simply couldn’t support their optimism, and the endless economic expansion of the ’90s wasn’t so endless after all. The Nasdaq’s P/E was well into triple-digit territory in the spring of 2000, aping a similar valuation bubble that blew Japan’s Nikkei index to the moon in the 1980s. And just as the Nikkei fell for a generation, the Nasdaq has also been looking up at March 10, 2000, ever since. A decade after that peak, the Nasdaq had lost 63% with inflation taken into account, compared with a real decline of 28% in the Dow over the same time frame. GE and IBM, which both set all-time marks near the Nasdaq’s peak, have spent more than a decade struggling to reclaim those levels. Still, they’ve done better than many Nasdaq stocks. A fifth of 1999’s newly public companies fell off the Nasdaq completely by the end of 2000, and half of the rest had lost more than half of their initial value.
The Nasdaq’s slide continues to be a low point for American markets many years later. Mark Hulbert of MarketWatch pointed out in early 2013 that “no other bear market in U.S. stock market history has been as awful as the Nasdaq’s since 2000.” In real terms, it was still 53% lower than its 2000 peak at the time, which makes it a worse performance than either the Dow’s brutal Depression-era secular bear market or the stagflationary weakness that kept returns low from 1966 to 1982. There’s still time for the Nasdaq to regain ground over these periods, but it’s going to take a very strong performance — perhaps on the scale of the 1990s — to recapture its old heights.